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Economic risks to watch out for in 2023

The world will end 2022 with big celebrations. Yet not because of robust economic growth, as growth this year is projected to be only 3.2% — following the International Monetary Fund's (IMF) recent projections — compared to 6.0% growth in 2021.

But because the world has waited two years to celebrate without masks or limited activities, except in China. Thailand has benefitted from such a celebratory mood which has seen floods of tourists. In October 2022, 66.3% of foreign tourists (discounting Chinese tourists who are not yet allowed to leave China) returned, when compared to the pre-Covid year of 2019. This is better than the government expected.

A classic example of pent-up demand. After two and a half years of economic hibernation from Covid control measures, consumers are ready to make up for postponed consumption, particularly in international travelling. The International Air Transport Association (IATA) estimates that global airlines revenue in 2022 to be 87% of 2019’s revenue, a quick rise from 60% a year before.

Unfortunately, the world economy is expected to deteriorate in 2023, due to high interest rates, high energy prices, high inflation, and slow growth in China. The IMF projects that world economic growth would slow down from 3.2% this year to 2.7% next year. There is a good chance that the 2023 growth figures will be revised downward in its upcoming World Economic Outlook projections, the January 2023 edition. On the other hand, 2022’s GDP growth could be revised upward, owing to the pent-up demand for consumption and travelling.

Do not expect to see lower world energy prices in 2023, despite the sluggish economic outlook. Industry experts seem to agree that the current level of oil prices, at around US$80 (2,700 baht) per barrel is probably below the fundamental prices. With inadequate new oil drillings between 2015-2020, the oil supply is presently tight and next year’s demand, particularly after China recovers from the Covid outbreak, will put tremendous pressure on the limited supply. Some major investors are expecting to see oil prices rise to above $100 per barrel next year.

If world oil prices stay in the $100 per barrel range, inflation will rise instead of subside in 2023. With higher than anticipated inflationary pressures, the US Fed might not stop raising the Fed Funds rate at 5.5%. The world economy could be in even worse shape.

Due to the not-too-bright economic prospects for 2023, the World Bank, along with domestic economic research houses, revised the Thai GDP growth outlook for 2023 downwards. In the case of the World Bank, next year’s growth projection was trimmed from 4.1% to 3.6%. The main reason is lower-than-expected global demand. However, continued recovery in the tourism industry and the high levels of private consumption will maintain the Thai GDP growth momentum.

There are three key risks involved with this projection. First, Thailand is highly dependent on exports, which makes our economy susceptible to global economic movements. In other words, “lower-than-expected” global demand cannot be too low. Second, it is almost impossible to make accurate assumptions on the number of incoming tourists. Third, Thai consumers might not be able to sustain their consumption due to inadequate financing sources.

First risk: Over-dependence on exports. On a global average, the export of goods and services accounts for 29.1% of GDP. Most countries are able to steer their domestic economies without worrying too much about the world economy. Thailand is not that fortunate as Thai exports of goods and services account for 69.7% of GDP. The economy is, therefore, heavily influenced by world economic growth. This was evident in 2009 when the world economy shrank by 1.3% and the Thai economy simultaneously contracted by 0.7%.

The influence of the world economy over the domestic economy is not only through exports but also through the production sector as well. A study reported that 22.3% of the Thai manufacturing sector is seen as “pure exporters” that export 100% of their products.

Any change in world demand will affect these manufacturers on a one-to-one basis. In the World Bank scenario of 3.6% growth, exports of goods are not allowed to contract more than 2.6%. This is not an easy task to accomplish as October 2022’s export value already declined by 3.6%.

Second risk: An inestimable number of foreign tourists. No economist can accurately predict the number of incoming foreign tourists. It is basically a “pick a number” game. Of course, economists can predict the trends. As a luxury product, international tourism should not bode well under “lower-than-expected” global demand conditions. The fact that the costs of vacationing are on the rise, especially airfares and accommodation costs, is not helping either. However, all research houses assume a continued recovery of the Thai tourism sector, with an assumption of the number of foreign tourists entering ranging from 19.2 million to 28.3 million for 2023.

From my mathematical calculations, the World Bank probably assumes that there would be 22.4 million foreign tourists visiting Thailand in 2023, or about 56.3% of the 2019 level. Too high? Too low? I really do not know as there is no empirical test to determine that. As said, it is a pick-a-number game.

But what I do know through model simulations is that if the assumption of the number of foreign tourists is reduced from 22.4 million to 19.2 million, then Thailand’s 2023 GDP growth will be cut from 3.6% to 2.7%. Yes. The tourism industry is the life and death of the Thai economy.

Third risk: Consuming without (adequate) money (again). The World Bank’s 3.6% growth projection calls for a 1.8% increase in private consumption over the 2022 level or a 7.3% increase over the 2019 level. This level of consumption growth should not be a problem if Thai consumers have not over-consumed in 2022.

Borrowing is not a viable choice as household debt level is near 90% of the GDP and, most importantly, bad debts are on the rise. The National Credit Bureau says that 8.4% of household debt is qualified as non-performing loans and another 3.1% of that is qualified as special-mentioned loans.

These figures from the end of 2022’s second quarter. By now, problematic debts could be substantially higher as Thai consumers consumed like there was no tomorrow in the third quarter of 2022.

To achieve such growth numbers, automobile sales in 2023 would be 1.056 million cars, requiring a minimum financing of half a trillion baht.

That amount would push household debt higher by almost 3% of GDP. Which banks are willing to finance such purchases?

A growth of 3.6% is certainly welcomed. But one must be aware of the risks involved, especially when the Thai economy depends on outside demand and consumers are overburdened with household debt.

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